During the hour-long discussion, the topic of public sector pensions came up a few times, and Mr. Pulaski stated that the average pension collected by retired state workers in California are not much more than social security. Referencing the chat log, he said:

“ArtPulaskiCLF:
the average state worker gets a pension of $24,000 and often without social security. Not lavish by any means
Tuesday March 8, 2011 12:48 ArtPulaskiCLF”

This is a profoundly misleading statement. When Pulaski, and others who share his perspective on these issues, use numbers this low, they are reporting an average that includes everyone on the CalPERS retirement rolls, even people who have barely vested their retirement benefit by only working five years for the state. Furthermore, this average includes part-time workers, and it includes long-time retirees who left the workforce before base pay and pension formulas had been increased significantly – and unsustainably – as they have in the last 10-15 years during the economic bubbles.

A more realistic way to gauge the fairness and financial sustainability of state worker pensions is to reference the average pension for currently retiring state workers who have logged 30 years of full-time work for the government. Using data from CalPERS annual report for the fiscal year ended June 30th, 2010, entitled “Shaping our Future,” (ref. page 151) the average pension for a state employee enrolled in CalPERS who retired last year after 30 years of service is $66,828 per year.

This amount, far in excess of the “$24,000″ claim by Pulaski, is based on data provided by CalPERS, and is further evidenced by evaluating the typical pension benefit formulas currently granted government workers in California. People employed by the University of California, for example, as can be seen on the “University Retirement Plan” (ref. page 13), will receive between 60% (30 years, age 55) and 75% (30 years, age 60) of the average of their final three years salary in retirement. Benefits for state and local public employees in California typically range between 2.0% and 2.5% times years worked, times their final salary.

For public safety employees, who comprise approximately 15% of the state and local public sector workforce in California, pension benefits typically are calculated based on 3.0%, times years worked, times their final salary. The labor agreement between Sacramento County and their firefighter union provides a representative example. (Ref. “Agreement between Sacramento Fire Fighters Union and City of Sacramento,” page 55.) For information on all bargaining units and their pensions in the City of Sacramento, refer to the links on their “City of Sacramento Labor Agreements” page. You will see that in the city of Sacramento, whose worker benefits are quite typical of the cities and counties in California, it is typical for workers currently retiring after 30 years to receive about two-thirds of their final salary in pension benefits.

To really understand what this means, it is necessary to come up with two additional estimates, (1) the average base salary for a government worker in California – which allows one to estimate the average pension of a retired government worker – and (2) the number of retired government workers. This allows one to calculate how much money is disbursed each year to pay retirement pensions to retired government workers. This amount, in-turn, can be compared to how much is being disbursed each year to pay retired private sector workers who collect social security.

Using California as an example, and using conservative assumptions (because the CalPERS data already noted suggests the average career pension to be far higher than $46K per year), the following table illustrates how much the average government worker makes per year both while working and during retirement, and compares it to how much the average private sector worker makes both while working and during retirement. These figures dramatically illustrate the disparity between government worker compensation and private sector worker compensation. On average, government workers collect a base salary that is nearly 50% more than private sector workers during their active careers, then collect over three times as much through their pensions in retirement than retired private sector workers collect from social security. In fact, the average government worker’s retirement pension is equivalent to the average private sector worker’s base wages while still working!

The cost to Californians of paying government workers, on average, a pension that is literally triple what the average private sector worker collects from social security is compounded by the fact that the ratio of government workers to government retirees is on-track to be 1-1, i.e., one worker for each retiree, whereas the ratio of active private sector workers to retired social security recipients is unlikely to ever dip below 2-1. This is because government workers typically work from ages 25 to 55, then retire for 30 years, and private sector workers typically work from ages 25 to 65, then retire for 20 years. An examination of projected age distributions in America for 2030, as documented on the U.S. Census Bureau’s International Database, indicates the United States is destined to have an even streamed age distribution, i.e., about 20 million citizens in each five year age group, which makes these calculations much easier. This disparity is illustrated in the table below:

What the above table demonstrates is the following: Notwithstanding investment returns, if there is only one active government worker – working 30 years – for every retired government worker – retired for 30 years, and if the average government pensioner receives a pension equivalent to two-thirds of what they made when they worked, then funding government worker pensions would require each government worker to contribute an amount equal to 66% of their salary towards supporting the retirees. By contrast, if at least two private sector workers – who work for 40 years and are retired for half that time – are employed for each one who is retired, and if the average private sector retiree receives a social security benefit equal to one-third of what they made when they worked, then adequately funding social security would require each private sector worker to contribute an amount equal to only 16% of their salary towards supporting the retirees. This reasoning holds enormous implications when assessing the relative long-term viability of government worker pensions vs. social security.

Perhaps the most dramatic illustration of the inequity of California’s government worker pensions averaging literally the same amount as what the average private sector worker earns while actively working is illustrated in the next table. The calculations are based on multiplying the average amount of the government worker pensions by the estimated number of retired government workers, and comparing that to the average amount of the social security benefit multiplied by the estimated number of retired private sector workers. To estimate California’s projected population of retired government workers, simply use the same number as their working population, 2.4 million, since on average they work 30 years and are retired 30 years. To estimate California’s projected population of retired private sector workers, similarly, just take the population of active private sector workers, 12.2, and divide by two, since on average they work 40 years and are retired 20 years. Data for these working populations can be found from the California Employment Development Dept., Labor Market Trends 2009.

On the above table, the green columns represent the projected number of retired social security recipients in California, 6.1 million, and the amount they will collect in aggregate in social security, $95 billion per year. The blue columns represent the projected number of retired government workers in California, 2.4 million, and the amount they will collect in aggregate in pensions, $110 billion per year. This is an astonishing projection. It indicates that the government will be spending more, in total dollars per year, to pay pensions to retired government workers, than it will be spending, in total dollars per year, to provide social security to retired private sector workers who are nearly three times as numerous.

To the extent these extravagant benefits have been approved by compliant politicians on behalf of government workers in other states, what these figures illuminate for California can be extrapolated to apply across the United States. To suggest that Wall Street pension fund investments are going to be able to make up for this disparity, and therefore somehow mitigate the burden this disparity places on taxpayers, is not only extremely debatable – because the high returns that pension funds delivered over the past 30+ years were driven by an unsustainable expansion of debt – but also specious. Because if Wall Street investments are the panacea, set to rescue taxpayers from the burden of supporting retired government workers, why are spokespersons for government worker unions blaming Wall Street at the same time as they fail to recognize that their pension funds are Wall Street?

If government worker pensions, whose solvency is currently guaranteed by taxpayers, are to be gambled on Wall Street, why isn’t the social security fund also gambled on Wall Street? Why do taxpayers bear the downside of the Wall Street manipulated economic meltdown not only for themselves and their own individual investments, but also take the hit and make up the difference for the government workers and their pension funds? Anyone representing government worker unions who claims Wall Street is both the problem and the answer should seriously examine their premises. And anyone who suggests government worker pensions are not extravagant, or do not place a crippling burden on taxpayers and government budgets, is not confronting the facts.

16 Responses to How Much Do Government Pensions Really Cost?

Ed, Nice and concise demonstration of the disparity between Public and Private Sector Pensions. I have been saying this for some time…. along with the necessary solution. Read on:

So let’s cut to the chase …….

Private sector employers typically contribute 3%-8% of an employee’s cash pay towards retirement, yet the total cost (expressed as a level annual % of cash pay throughout one’s career) of Public Sector Defined Benefit pensions (for a 30-year employee retiring at age 55) ranges from 29% to 58% depending on the richness of the benefit formula (with safety workers generally at the highest end).

More specifically, for the noted formulas, the level annual %s of cash pay are as follows:
2% per year of service w/o COLA – 29%
2% per year of service with COLA – 39%
3% per year of service w/o COLA – 44%
3% per year of service with COLA – 58%

Even after deducting the typical employee contribution of about 5% of pay, that still leaves the employer (meaning TAXPAYERS) contributing 24% to 53% of pay. The middle of these %s is 38.5% vs 5.5% (the middle of the range of what Private Sector employers contribute) or SEVEN (yes SEVEN) times greater.

This is completely absurd, and the very modest “tweaking” at the edges by practically begging employees for a few more percent of pay contributions will NOT even begin solve the HUGE financial problem.

TOTAL COMPENSATION (Cash Pay plus Pensions plus Benefits) should be comparable in the Public and Private Sectors for similar jobs, and with Cash Pay in the Public Sector now AT LEAST equal to (if not greater) than that in the Private Sector, there is ZERO justification for greater Public Sector Pensions and Benefits .

Not for PAST service, but for FUTURE service, Public Sector pension accruals must immediately be brought FULLY down to the level of their Private Sector counterparts. Due to the huge reduction needed, the ONLY way to do this is to freeze the current defined benefit plans for CURRENT (yes CURRENT) workers, and switch everyone into a 401K-style Defined Contribution Plan with an employer contribution in the same 3%-8% range granted Private Sector workers.

Additionally, since Private Sector retirees rarely get any retiree healthcare subsidy before eligibility for Medicare at age 65, similar restrictions should apply to Public Sector retirees.

It’s TAXPAYERS’ money and Civil Servants are NOT more worthy of bigger pensions and better benefits.

“More specifically, for the noted formulas, the level annual %s of cash pay are as follows:
2% per year of service w/o COLA – 29%
2% per year of service with COLA – 39%
3% per year of service w/o COLA – 44%
3% per year of service with COLA – 58%”

What rate of investment fund return (the real rate, after inflation) are you using?

(a)annual salary (compounded) increase of 6% in each of the 30 years
(b)pensions contributions (the % of pay in my earlier comment) occur in mid-year, and are accumulated to the end of the 30-th year at the same interest rate used in (a) above.
(c) the Lump SUM equivalent at (age 55) retirement is 15 times the annual annuity for pensions w/o COLA increases and 20 times for pension with COLA increases.

Interestingly, I tested this using 5% and 7%, with virtually no change in the percentages shown in my earlier comment. However (as expected) the percentages decrease (increase) when the earnings rate on the annual contributions is greater (less) than the annual increase in salary.

By the way, (and w/o doing any particular testing), I believe the 66% figure you are showing in the article reflects “pay-as-you-go” funding, while mine reflects pre-funding the pension over the 30-year working career. That’s why my percentages are lower (even for the richest Plan, 3 with COLA).

The chart goes in five year increment until the last entry where it says 30 and above years of work.

That could mean 40 years as in my case or even more.
Yet you make a blanket statementof 30 years.

I quote “the average pension for a state employee enrolled in CalPERS who retired last year after 30 years of service is $66,828 per year.”

So it obviously includes workers with 35 years and 40 years and 45 and more.

Such employees are also likely to have promoted many times and are at the top of their wage tier.

Pulling out the top of the wages and time (while misrepresenting the amount of time) to prove they are average seems to not be representative.

A better average would be any State employee making $60K per year who would retire after 30 years at 55 today who would collect $36K per year.

Or if they stayed until 60 and worked 35 years would receive about $47250 per year.

I have no idea if the salary mentioned in some articles lately of $68K are average or median, median would be lower.
How ever a person working for 35 years at the $68K number I have seen would earn at age 60 $53550 in retirement. Where do your numbers come from?

The chart goes in five year increment until the last entry where it says 30 and above years of work.

That could mean 40 years as in my case or even more.
Yet you make a blanket statementof 30 years.

I quote "the average pension for a state employee enrolled in CalPERS who retired last year after 30 years of service is $66,828 per year."

So it obviously includes workers with 35 years and 40 years and 45 and more.

Such employees are also likely to have promoted many times and are at the top of their wage tier.

Pulling out the top of the wages and time (while misrepresenting the amount of time) to prove they are average seems to not be representative.

A better average would be any State employee making $60K per year who would retire after 30 years at 55 today who would collect $36K per year.

Or if they stayed until 60 and worked 35 years would receive about $47250 per year.

I have no idea if the salary mentioned in some articles lately of $68K are average or median, median would be lower.
How ever a person working for 35 years at the $68K number I have seen would earn at age 60 $53550 in retirement. Where do your numbers come from?

ToughLove, thanks for the response. I think your rate of salary increase could be high – if you assume 3% inflation you are assuming a 3-4% per year merit increase per year. I have usually made the assumption that in real dollars the annual merit increase is such that salary doubles between the career start and the career end, i.e., about 2.4% per year. In any case, if your fund return assumptions mirrored your merit increase assumption you are looking at a real rate of fund return of 3-4% per year which is the range I’ve also worked in. I typically contrast 3% per year (real) rates of return to the 4.75% (real) rates of return that CalPERS still adheres to. I think 3% is far more realistic, and the difference in contribution requirements when comparing a 3% return to a 4.75% return are dramatic – basically if at a rate of 4.75% you had to contribute 35%, at a rate of 3% you have to contribute 55%. This is why CalPERS is in a lot more trouble than they care to admit.

Charles, we are simply using 30 years as an AVERAGE. This is a sound working assumption and doesn’t invalidate your point – we are simply assuming that in the retired population of government workers, for every person who spent 40 years in government service, like you, there is someone else who has spent 20 years in government service.

Ed, I used the 6% salary increase assumption because over a 30 year career, the typical worker would have likely received one or more “promotions” or moved to higher level (and pay) positions. The 6% was intended to reflect BOTH the impact of merit and promotional increases. But remember, when the salary increase assumption equals the gross investment return assumption, there is VERY little difference in the resultant level %s of pay needed to fully fund the pension over the 30 year career.

Ed this stuff is REAL easy to do in Excel spreadsheets. Solving for the resultant level %s of pay is done by using a “trial value” % of pay assumption followed by using Excel’s “goalseek” feature to SOLVE for the level % of pay for which (1)=(2) where (1) is the lump sum value of the pension (determined by multiplying the pension-formula calculated annual pension multiplied by the factor of 15 or 20 discussed earlier), and (2) is the interest-accumulated value of the annual contributions taken at the end of the 30-th year. By using an Excel speadsheet, you can “scenario-test” (individually, or in conjunction with others) the impact of various changes in your assumptions.

“Charles, we are simply using 30 years as an AVERAGE. This is a sound working assumption and doesn’t invalidate your point – we are simply assuming that in the retired population of government workers, for every person who spent 40 years in government service, like you, there is someone else who has spent 20 years in government service.”

This is not a valid assumption.

For every 20 year journeyman person there is a 40 year well experienced and higher paid person who has paid more in to retirement per year and for far more many years. Taking a 20 year employee and a 40 year employee and saying a thirty year employee is a good indication of personnel makes no sense.

This is not about averages.

Twenty year employees tend to be in strictly ministerial positions.

40 year employees tend to be in positions where they can save their employers large amounts of money.

I saved Caltrans one third of a million dollars in 1986/1986alone when I was making a salary of about $45K per year.

Charles, it is completely illogical to assume (as you said) …”For every 20 year journeyman person there is a 40 year well experienced and higher paid person who has paid more in to retirement per year and for far more many years.”

Clearly there are many more 20-yr service retirees than 40-yr service retirees. While the 40-yr employee is very likely higher paid, and has certainly paid much more into the pension system, when these differences are weighted by the MUCH MUCH higher percentage of 20 vs 40 year service retirees, I’d bet the contribution-weighted average retirement service duration is below 30, not above it.

Since there are far, far more 20 year employees than 40 year employees then we should look at 20 year employees pensions.

That still doesn’t change the basic fact that 30+ employeesincludes from 30 years and up which can cover a lot of territory.

To state a 30 year employee makes x amount of money in retirement without mentioning that employee might also have 35 or 40 or 45 years is not reasonable.

Shouldn’tthe article say persons who have worked 30 years get an average pension of $66,828 per year, oh and by the way that includes people who worked half again longer, not just 30 years but in some cases much longer.

The most a miscellaneous employee can get with 30 years at 63 is 75%. If the average salary is $68K, which I see quoted but don’t quite believe, then the most that person could receive would be $51K.

And if that person retired at 55 he would receive $34K for thirty years.

Perhaps you and Mr. Ring should inquire from Calpers what the average pension is at 30, 35,40, and 45 years.

The chart Mr. Ring refers to plainly says 30+. So don’t try to make it look like this is what a person with 30 years gets.

Mr. Rings quote was ” the average pension for a state employee enrolled in CalPERS who retired last year after 30 years of service is $66,828 per year.”

Charles, Instead of delving into this minutia, please re-read my first comment (#1 in the list of comments), and tell me how with cash pay in most (maybe not for engineers, but this isn’t about just you) occupations relatively close in the Public and Private sectors, the MUCH MUCH greater Public sector pensions, with taxpayers paying for them (as I demonstrated) can even remotely be justified.

Be honest …. you’re already retired, and short of a complete collapse of the pension system, it is quite unlikely an changes will impact you.

While the Little Hoover Report says the pensions are more (and unnecessary) generous, unsustainable and unfair to taxpayers, Mr. Locklear’s position (in your Linked article) seems to be that pensions must be sufficient to provide a very comfortable (if not luxurious) level of income but without addressing where the money to pay for that will come from.